China Labour Bulletin is quoted in the following article. Copyright remains with the original publisher
By DAN LEVIN
NOV. 3, 2015
BEIJING — With the blessing of local officials, Amir Porat, an Israeli entrepreneur, set up a surgical supply factory in 2013 in China’s coastal Jiangsu Province, training workers and taking orders. All he needed to start production was $250,000 of specially designed molding equipment from Israel.
More than two years and $1 million in costs later, he is still waiting for the shipment. Chinese customs officials have demanded a permit for importing medical devices, although Mr. Porat insisted the equipment was ordinary manufacturing machinery. Last year, he decided to close the factory before it ever opened.
“We had to pay salaries and rent,” Mr. Porat said by telephone from Israel. “We’re not a big company and we just couldn’t afford to lose and lose.”
At a time of slowing economic growth, Beijing has sought to assure foreign companies that China is a welcoming place to do business. In a speech to American business leaders in September, China’s president, Xi Jinping, pledged to protect the rights of overseas investors and to provide “a level playing field.”
But the plight of Mr. Porat and other overseas entrepreneurs underscores some of the challenges small and midsize businesses face once they arrive. While China beckons with opportunity, cheaper labor and a huge market, it often frustrates with bewildering bureaucracy, entrenched corruption and a byzantine legal system, experts say.
“There’s a feeling that fewer S.M.E.’s are taking the jump and coming to China,” said Chet Scheltema, a managing partner at Dezan Shira & Associates, a consulting firm that specializes in foreign direct investment in Asia, referring to small and medium-size enterprises. “They’re a little more cautious and we’re closing a surprising number of companies.”
Big cities like Beijing, Shanghai and Guangzhou have in recent years drawn thousands of expatriate entrepreneurs who have opened restaurants, branding consultancies and start-ups. They have helped transform an economy that had long been dominated by manufacturing, real estate development and government infrastructure spending.
While China is generally a challenging environment in which to navigate, overseas entrepreneurs can be more vulnerable. Many lack the political muscle and deep pockets of multinational corporations or their domestic peers. They also may lack the guanxi, or personal connections, needed to overcome unforeseen bureaucratic hurdles.
The problems run deep. In a recent survey of its members, the U.S.-China Business Council found that 97 percent of companies, including large multinationals, said they lacked the financing advantages, access to contracts and ease of licensing that state-owned enterprises received.
“When you talk to other expats about setting up a business, one of the first things they tell you is ‘be careful,’ ” said Reza Afshar, the British founder of an e-commerce company in China that sells face masks, air purifiers and other pollution protection products. “Everyone’s got a story of someone who’s been burned in the Chinese business world.”
Mr. Afshar said he failed to to see the warning signs. The joint venture with a Chinese friend, he later discovered, was actually a fully Chinese-owned business. Mr. Afshar was listed as the minority shareholder, though he paid 70 percent of the registration costs.
As the business grew, his partner, according to Mr. Afshar, began removing himself from daily operations and then departed on a string of overseas vacations. Mr. Afshar was left to deal with clients, suppliers and employees, he said.
“It was like if we were a couple and when the baby was six months old he goes to the pub every day and then eventually runs off,” he said. Then, Mr. Afshar said, the partner threatened to sabotage the company unless he was bought out — while still receiving 50 percent of future profits.
The partner, AJ Song, described their partnership in more equitable terms, but confirmed that he used his advantages as a Chinese national to bargain hard for what he felt he deserved. “I said if he wants to end ugly, I can take it all away because all the connections are mine,” he said. “It doesn’t mean that much for me because if I want to do the same business again, I can.”
Mr. Afshar eventually sold the company and has since moved back to London. He has no plans to return. “The risk of getting played in China is just too high,” he said.
The Chinese government has tried in recent years to improve the business environment by upgrading legal protections. But critics say political connections and corruption continue to undermine the law.
James Zimmerman, chairman of the American Chamber of Commerce in China, said concerns remained about interference by the authorities in court proceedings. “Full accountability will only come with an independent judiciary that provides effective oversight and renders decisions without fear of retaliation or without influence by the political process,” he wrote in an email.
For many international business owners, legal disputes do not always resolve favorably, even with clear legal protections in place.
Neil Schmid had high hopes when, in 2012, he arrived in Beijing to start a Chinese social enterprise under DKT, a global health organization that provides contraceptives to more than 50 million people in the developing world. But instead of focusing on selling condoms, Mr. Schmid had to deal with a series of disputes involving employees.
He said he was forced to fire a sales manager whom he suspected of embezzling $60,000, as well as her replacement, who he believed forged documents. The company’s marketing manager later admitted to Mr. Schmid that he had used the editing software Adobe Photoshop to disguise his true identity and to falsify his transcript from an elite American university after Mr. Schmid noticed discrepancies.
“It was like living with a snake under your desk,” Mr. Schmid said.
Resolving the embezzlement case through China’s legal system, he quickly learned, was not simply a matter of providing evidence. The Chinese authorities have wide discretion over whether to accept a case and there are no clear standards regulating what kinds of cases they must investigate.
“Chinese police seldom accept cases like ours, in which the amount of money involved is not too much and there is no pressure or attention to it,” said Sun Wenjie, a lawyer hired by Mr. Schmid to handle the matter.
Mr. Sun urged Mr. Schmid to pressure the sales manager to “repent” and return the money. The sales manager ultimately agreed to do so, but was left with her reputation intact. She still lists DKT on her LinkedIn profile.
Reached by phone, Li Shiying, the former sales manager, declined to answer questions about the dispute. “The case is closed,” she said. “If I lost, I lost.”
While companies can turn to arbitration, this form of dispute resolution has its own issues.
In 2008, the Chinese government passed a law to clarify the duties of mediation and arbitration committees, which gave workers greater ability to seek legal redress for claims of labor violations, according to the China Labour Bulletin, a labor rights organization based in Hong Kong. Since then, the number of labor dispute cases has more than doubled to 715,000 in 2014, according to the Ministry of Human Resources and Social Security.
Though arbitration is required by law to conclude within 60 days, many cases take up to eight months. “When you ask them why it takes this long, they simply answer ‘too many cases to handle,’ ” said Shen Binti, a labor lawyer in Beijing.
For many entrepreneurs, the shifting legal terrain is proving increasingly difficult to navigate. “Police don’t want to write up a report, courts don’t want any more cases and the government encourages arbitration,” said Mark Natkin, an American business consultant in Beijing. “In that respect it can be an uncomfortable environment for a company that’s not ready to adapt to legal uncertainties.”
Jennifer Eden, an Australian restaurateur, said she had lost three businesses to locals when contracts were not enforced. In one instance, she said, a landlord doubled the rent in a lease for a coffee shop she and her Brazilian business partner opened.
“The police came and said, ‘If you can’t afford double the rent then you shouldn’t be in business,’ ” Ms. Eden said. At another restaurant they owned — with a five-year contract — the landlady drilled through the locks. “She leased it to someone else and gave them the key with all our equipment inside,” she said. “Our contract meant nothing.”